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Dow falls 512 in steepest decline since '08 crisis

NEW YORK - Gripped by fear of a new recession, the stock
market suffered its worst day Thursday since the financial crisis
in the fall of 2008. The Dow Jones industrial average fell more
than 500 points, its ninth-steepest decline.

The sell-off wiped out the Dow's remaining gains for 2011. It
put the Dow and broader stock indexes into what investors call a
correction - down 10 percent from their highs in the spring.

"We are continuing to be bombarded by worries about the global
economy," said Bill Stone, the chief investment strategist for PNC
Financial.

Across the financial markets, the day was reminiscent of the
wild swings that defined the financial crisis in September and
October three years ago. Gold prices briefly hit a record high. Oil
fell even more than stocks - 6 percent, or $5.30 a barrel. And
frightened investors were so desperate to get into some government
bonds that they were willing accept almost no return on their
money.

It was the most alarming day yet in the almost uninterrupted
selling that has swept Wall Street for two weeks. The Dow has lost
more than 1,300 points, or 10.5 percent. By one broad measure kept
by Dow Jones, almost $1.9 trillion in market value has disappeared.

For the day, the Dow closed down 512.76 points, at 11,383.68. It
was the steepest point decline since Dec. 1, 2008.

Thursday's decline was the ninth-worst by points for the Dow. In
percentage terms, the decline of 4.3 percent does not rank among
the worst. On Black Monday in 1987, for example, the Dow fell 22
percent.

Two weeks ago, investors appeared worried about the deadlocked
negotiations in Washington over raising the ceiling on government
debt. As soon as the ceiling was raised, investors focused on the
economy, and the selling accelerated.

On Thursday, growing fear about the weakening U.S. economy was
joined by concern in Europe that the troubled economies of Italy
and Spain might need help from the European Union.

The European Union has already given financial assistance to
Greece and Ireland, two countries that have struggled to pay their
debts. A financial rescue package for Italy or Spain might be more
than the group of countries can handle.

Traders also unloaded stocks before Friday's release of the
government's unemployment report for July, which is expected to
show weak job growth and perhaps a rise in the unemployment rate,
which is 9.2 percent.

Together, they produced "a perfect storm of selling," said
Ryan Larson, head of U.S. equity trading for RBC Global Asset
Management.

Until a week ago, Wall Street had mostly convinced itself that
the U.S. economy would improve in the second half of the year. Gas
prices were falling, and Japanese factories were resuming
production after disruptions from the March earthquake.

Then one report after another began to show that the economy was
much weaker than first thought.

Manufacturing is barely growing. The service sector, which
covers about 90 percent of the American work force, is growing at
the slowest rate in a year and a half. People spent less in June
than in May, the first decline since September 2009.

And the overall economy is expanding at the slowest pace since
the end of the Great Recession. It grew at an annual rate of just
0.8 percent for the first six months of this year, raising the risk
of another recession.

In an indication of how frightened investors are, Bank of New
York Mellon said it would start charging large investors to hold
their cash because they are depositing so much. The bank's clients
include pension funds and large investment houses that are selling
stock and need to deposit the proceeds.

Mark Luschini, chief investment strategist for Janney Montgomery
Scott, an investment firm in Philadelphia, said his clients saw the
move from stocks into cash as "a parking lot to sort things out."

"With the scars of 2008 still fresh," he said, "some clients
don't want to miss the chance to pre-empt further damage should it
come."

Wells Fargo Advisers, a financial management company in St.
Louis, said clients were more nervous.

"I wouldn't say they're totally panicking. But obviously nerves
are rattled," said Scott Marcouiller, chief technical market
strategist there. "And I think that is simply because of the speed
of the decline."

Other market indicators reinforced the risk-averse mood. Gold,
which is seen as a safe investment when the stock market is
turbulent, set a record price, $1,684.90 an ounce, before falling
to finish the day at $1,659. Adjusted for inflation, gold is still
far below the record reached in 1980.

The yield on the 10-year Treasury note fell to 2.42 percent, its
lowest of the year, and the yield on the 2-year Treasury note hit
its lowest ever, 0.265 percent. Bond yields fall when demand for
bonds increases.

The yield on the one-month Treasury bill fell to almost nothing
- 0.008 percent. Investors were willing to accept paltry returns in
exchange for holding investments they believed to be stable.

The sell-off was broad. All 10 industry groups in the Standard &
Poor's 500 index fell. Energy companies lost almost 7 percent,
materials companies were down 6.6 percent, and industrial companies
lost more than 5 percent.

For a time, Kraft Foods was the only stock to rise among the 30
that make up the Dow industrials. Kraft announced Thursday that it
would split in two, with one company focusing on snacks and the
other groceries. But the selling eventually dragged Kraft under,
too, and its stock finished down 52 cents, at $33.78.

Steep stock market losses like the ones of the past two weeks
can be self-reinforcing. A drop in stocks erodes household wealth
and raises doubts about the economic outlook.

The result can be what economists call a vicious cycle. Stock
losses take a toll on consumer confidence and make people more
reluctant to spend money. Consumer spending makes up 70 percent of
economic output in the United States.

"This is not 2008 again," he said. "We don't have a liquidity
crisis, we don't have a credit crisis - this is just profit
taking."

Cook said he believes the S&P 500, which closed Thursday at
1,200.07, will trade between 1,150 and 1,250 between now and Oct.
1, at least until investors have enough information to determine
whether the economy is in recession again.

Even taking into account the recent declines, stocks are still
considered to be in an impressive bull market that began March 9,
2009, when the market reached its recession low.

The Dow closed that day at 6,547. Since then, it is up about 74
percent.

One year ago, the Dow closed at 10,680. About a month later, the
stock market began a rally that took the Dow almost to 13,000. The
catalyst was an announcement by Federal Reserve Chairman Ben
Bernanke that the Fed was preparing to launch a program to buy $600
billion in government bonds to keep interest rates low and help
stocks rally.

The sell-off now comes at a time when corporate profits are
growing. For the S&P 500, a measure called the forward
price-to-earnings ratio has fallen to about 12, well below its
long-term average of 16. That means that investors who buy now are
paying less for each dollar in profits.

Based on what an investor now pays for corporate profits, stocks
are now trading at their lowest levels in 20 years, said Tim
Courtney, chief investment officer of Burns Advisory Group in
Oklahoma City.

But few companies were spared in the sell-off Thursday. Just
three of the 500 stocks in the S&P 500 moved higher. General Motors
fell 4 percent despite beating analyst estimates for its quarterly
earnings.

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AP Business Writers Dave Carpenter in Chicago, Paul Wiseman in
Washington and Pallavi Gogoi and Seth Sutel in New York contributed to this report.